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Input versus Output Taxation in an Experimental International Economy

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Author Info

  • Arno Riedl

    ()
    (CREED, Faculty of Economic and Econometrics, University of Amsterdam)

  • Frans van Winden

    ()
    (CREED, Faculty of Economic and Econometrics, University of Amsterdam)

Abstract

This discussion paper led to a publication in 'European Economic Review' , 56(2) 216-32. This paper is concerned with a policy oriented macroeconomic experiment involving an 'international' economy with a relatively small 'home' country and a large 'foreign' country. It compares the economic performance of two alternative tax systems as a means to finance unemployment benefits: a sales-tax-cum-labor-subsidy system versus a wage tax system. The two systems are applied to the home country, while the wage tax system always obtains in the foreign country. In stark contrast with expectations of experts the sales tax system clearly outperforms the wage tax system, using standard economic indicators. It is argued that producers' reluctance to incur costs up-front while being uncertain about product prices can explain this outcome. Several pieces of evidence are provided to support this claim. The results strongly suggest that behavioral aspects have to be taken into account also in applied macroeconomic models.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-058/1.

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Date of creation: 08 Jul 2003
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Handle: RePEc:dgr:uvatin:20030058

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Web page: http://www.tinbergen.nl

Related research

Keywords: laboratory experiment; wage tax; sales tax; macroeconomic policy;

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References

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Cited by:
  1. Shachat, Jason & Zhang, Zhenxuan, 2012. "The Hayek hypothesis and long run competitive equilibrium: an experimental investigation," MPRA Paper 39579, University Library of Munich, Germany.
  2. Roberto Ricciuti, 2003. "Bringing Macroeconomics into the Lab," Royal Holloway, University of London: Discussion Papers in Economics 03/9, Department of Economics, Royal Holloway University of London, revised Dec 2003.
  3. Casoria Fortuna & Riedl Arno, 2012. "Experimental labor markets and policy considerations: Incomplete contracts and macroeconomic aspects," Research Memorandum 058, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. Arno Riedl, 2009. "Behavioral and Experimental Economics Can Inform Public Policy: Some Thoughts," CESifo Working Paper Series 2902, CESifo Group Munich.

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